Jesse Livermore was an early innovator in the trading world as one of the first traders to create a trading plan and a system. He basically invented price action trading and trend following in the early 20th century. He had higher highs and lower lows than most people can even imagine, he both became wealthy and blew up his trading accounts many times. He made huge amounts of money on the crashes of 1907 and 1929, it is said that he made over $100 million on the 1929 crash while others were ruined. While many disregard his wisdom because he ended up committing suicide I disagree. I think that is like saying Earnest Hemingway’s or Hunter Thompson’s writing wasn’t good because they committed suicide in the end. Unlike what many believe trading legend Jesse Livermore did not die broke, he set up a trust for himself and his last wife was wealthy. His biggest weakness was his position size and managing his risk of ruin, the same aggressiveness that made him a fortune caused his blow ups during every losing streak. We can learn a lot about how to trade price action from him but must use risk management to keep the money we make.
Here is his wisdom on how to trade price action:
“I did precisely the wrong thing. The cotton showed me a loss and I kept it. The wheat showed me a profit and I sold it out. Of all the speculative blunders there are few greater than trying to average a losing game. Always sell what shows you a loss and keep what shows you a profit.” – Jesse Livermore
Cut your losses short and let your winners run. This creates big wins, small losses, and profitability.
“After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight!” – Jesse Livermore
The patience to wait for the right trading set up and then sit and hold a position on the right side of a trend is the path to profitable trading
“Experience has proved to me that real money made in speculating has been in commitments in a stock or commodity showing a profit right from the start.” – Jesse Livermore
You will know your entry is a good one because you will show a profit right from the beginning and give yourself a margin of safety.
“There is only one side to the stock market; and it is not the bull side or the bear side, but the right side” – Jesse Livermore
Don’t stay mentally stuck as a bull or a bear, stay mentally flexible to go with the market trend.
“In a narrow market, when prices are not getting anywhere to speak of but move within a narrow range, there is no sense in trying to anticipate what the next big movement is going to be. The thing to do is to watch the market, read the tape to determine the limits of the get nowhere prices, and make up your mind that you will not take an interest until the prices breaks through the limit in either direction.” – Jesse Livermore
The odds are that after a long term trading range that the market will move in the direction of the breakout of the price range.
“I think it was a long step forward in my trading education when I realized at last that when old Mr. Partridge kept on telling other customers, “Well, you know this is a bull market!” he really meant to tell them that the big money was not in the individual fluctuations but in the main movements that is, not in reading the tape but in sizing up the entire market and its trend.” – Jesse Livermore
The big money is made in the big trends not trying to trade every little move.
“A prudent speculator never argues with the tape. Markets are never wrong, opinions often are.” – Jesse Livermore
When you are losing money, you are wrong, not the market.
“Don’t take action with a trade until the market, itself, confirms your opinion. Being a little late in a trade is insurance that your opinion is correct. In other words, don’t be an impatient trader.” – Jesse Livermore
Wait for your trading signal before you enter a trade.
“It is foolhardy to make a second trade, if your first trade shows you a loss. Never average losses. Let this thought be written indelibly upon your mind.” – Jesse Livermore
Never add more to a losing trade, the odds are that you are trading against the trend and just creating a bigger loss.
“One of the most helpful things that anybody can learn is to give up trying to catch the last eighth – or the first. These two are the most expensive eighths in the world. They have cost stock traders, in the aggregate, enough millions of dollars to build a concrete highway across the continent.” – Jesse Livermore
It can be expensive to try to catch the exact top or bottom of a trend. Just trade to catch a good piece of a trend.